Category: Income Tax

Winter Fuel Payment tax charge

The June 2025 reforms introduce a £35,000 income limit for keeping the Winter Fuel Payment, with HMRC recovering the payment from those above the threshold.

The WFP is a tax-free payment provided by the government to help older people keep warm during winter. The amount of the payment depends on individual circumstances but ranges from £100 to £300. The amount you receive depends on a number of factors including your age and the age of other people living with you.

Pensioners whose taxable income exceeds £35,000 will still receive payment but this will be recovered in full by HMRC using the new WFP tax charge. The recovery will be handled through PAYE tax‑code adjustments or the self-assessment return, depending on the taxpayer’s circumstances.

The threshold applies to individuals, not household income. This means that in some couples, one person may keep their payment while the other has theirs reclaimed, depending on individual incomes. Individuals in receipt of certain social security benefits in the qualifying week for winter payments will not be liable to the charge, regardless of income. 

Update from HMRC on MTD testing

HMRC has published a new Making Tax Digital newsletter. This newsletter is mainly intended for taxpayers and agents who are currently testing the Making Tax Digital for Income Tax (MTD for IT) system. MTD for IT will become mandatory in phases from April 2026.

For nearly two years, HMRC has been stress-testing its MTD for IT systems to ensure they can support increasing numbers of volunteer taxpayers. So far, HMRC has confirmed that testing has successfully deal with:

• The sign-up process works for individuals and agents, including those with non-standard accounting periods.
• Volunteers can make and edit quarterly submissions and add income sources.
• Volunteers can opt out of quarterly obligations.
• PAYE income pre-populates into estimated payments on account.
• Payments are correctly allocated within MTD for IT.

More recent testing in 2025 as HMRC scales up the rollout include:

April–June 2025

• Re-testing sign-up to confirm it can cope with larger volumes.
• Testing the ability for volunteers to appoint multiple agents (one for quarterly returns and one for end-of-year submissions).

July–September 2025

• Ensuring taxpayers and agents can make their first quarterly update via software completing the quarterly requirement.
• Checking the accuracy of estimated payments on account based on income to date.
• Testing key functions in the digital tax account, such as adding or stopping income sources and opting in or out of the service.

During the testing phase, there are no penalties for late submissions, but submitting on time is encouraged by HMRC as it helps those testing the system understand the requirements and allows for the service to be properly stress tested.

If your qualifying income is over £50,000 in the 2024–2025 tax year, you will be required to start using MTD for IT from 6 April 2026. There are some minimal exemptions in place.

Less than 1 month to self-assessment filing deadline

There is now less than 1 months to the self-assessment filing deadline for submissions of the 2024-25 tax returns. We urge our readers who have not yet completed and filed their 2024-25 tax return to file as soon as possible to avoid the stress of last-minute preparations as the 31 January 2026 deadline fast approaches.

You should also be aware that payment of any tax due should also be made by this date. This includes the remaining self-assessment balance for the 2024-25 tax year, and the first payment on account for the 2025-26 tax year.

Earlier this year, more than 11.5 million people submitted their 2023-24 self-assessment tax returns by the 31 January deadline. This included 732,498 taxpayers who left their filing until the final day and almost 31,442 that filed in the last hour (between 23:00 and 23:59) before the deadline!

There is a new digital PAYE service for the High Income Child Benefit Charge (HICBC). This allows Child Benefit claimants who previously used self-assessment solely to pay the charge to opt out and instead pay it through their tax code.

If you are filing online for the first time you should ensure that you register to use HMRC’s self-assessment online service as soon as possible. Once registered an activation code will be sent by mail. This process can take up to 10 working days. 

If you miss the filing deadline you will be charged a £100 fixed penalty (unless you have a reasonable excuse) which applies even if there is no tax to pay, or if the tax due is paid on time. There are further penalties for late tax returns still outstanding 3 months, 6 months and 12 months after the deadline. There are additional penalties for late payment of tax amounting to 5% of the tax unpaid at 30 days, 6 months and 12 months.

Who pays Income Tax in Scotland

The rules that govern who pays Income Tax in Scotland is determined by whether an individual is considered a Scottish taxpayer. For most people, determining Scottish taxpayer status is straightforward. Individuals who live in Scotland are considered Scottish taxpayers, while those who live elsewhere in the UK are not.

If a taxpayer has homes in both Scotland and elsewhere in the UK, HMRC guidance is used to determine their main home for Scottish Income Tax purposes. Those without a permanent home who regularly stay in Scotland, such as offshore workers or hotel residents, may also be liable for SRIT.

If a person moves to or from Scotland during a tax year, their tax liability is determined by where they spent the majority of that year. Scottish taxpayer status applies to the entire tax year and cannot be split.

Those defined as Scottish taxpayers are liable to pay the Scottish Rate of Income Tax (SRIT) on their non-savings and non-dividend income.

Autumn Budget 2025 – Personal Tax changes

The chancellor Rachel Reeves announced as part of the Autumn Budget measures that the Income Tax thresholds will be maintained at their current levels for a further three years until April 2031. This will see the personal tax allowance frozen at £12,570 through to April 2031 across the UK. In addition, the higher rate threshold will remain at £50,270 (there are differences in Scotland). National Insurance thresholds will also remain frozen until 2031.

This means that more taxpayers will be pushed into paying higher taxes as income increases at a far faster rate than the frozen tax bands. This phenomenon is known as fiscal drag. The freezing of most of the Income Tax allowance and rates at current levels until 2031 means that many taxpayers will pay more Income Tax as their income increases with no corresponding increases in their allowances and more taxpayers will see their taxable income boosted into the 40%, or 45%, Income Tax bands.

The existing thresholds for the basic rate, higher rates and additional rates of tax have also been frozen where income is derived from employment or self-employment. However, the government will create separate tax rates for property, savings & dividend income.

• Tax on most dividend income will increase by 2% from April 2026. The ordinary rate will rise from 8.75% to 10.75%, and the upper rate from 33.75% to 35.75%. The additional rate will remain unchanged at 39.35%.

The changes to the tax rates for property and savings income will take effect from April 2027.

• From 2027-28, the property basic rate will be 22%, the property higher rate will be 42%, and the property additional rate will be 47%. These rates will apply across England, Wales and Northern Ireland.
• From 2027-28, the savings basic rate will be increased to 22%, the savings higher rate will be increased to 42% and the savings additional rate will be increased to 47%.

The current rules that allow Basic Rate taxpayers to receive £1,000 of interest without paying tax, and Higher Rate taxpayers to receive £500 without paying tax are set to remain as is the Starting Rate for Savings of up to £5,000 for lower earners.

MTD – qualifying income

Making Tax Digital for Income Tax (MTD for IT) will become mandatory in phases from April 2026. If you are self-employed or a landlord and have over £50,000 in qualifying income you need to start preparing to submit quarterly updates, keeping digital records and cope with a new penalty system.

Your qualifying income is the total income you receive in a tax year from self-employment and property. Other income, such as from employment (PAYE), partnerships or dividends (including from your own company), do not count towards your qualifying income.

HMRC will calculate your qualifying income based on your self-assessment tax return you submitted in the previous year. For example, to assess your income for the 2026-2027 tax year, they will use the return you submit for the 2024-2025 tax year which is due to be submitted by 31 January 2026. If your qualifying income is over £50,000, HMRC will inform you when you need to start using MTD for IT.

Qualifying income includes your share of income from jointly owned property, certain trusts, VAT-registered businesses and disguised investment management fees. It does not include business partnership income, transition profits or qualifying care relief payments.

Initially, MTD for IT will only apply to self-employed individuals, and landlords with an annual qualifying income exceeding £50,000. From 6 April 2027, the rules will extend to those with a qualifying income between £30,000 and £50,000. From April 2028, sole traders and landlords with qualifying income over £20,000 will need to follow MTD rules. The government is also exploring ways to bring those earning under £20,000 within the MTD framework at a future date.

Christmas crafters and tax

If you earn fees or sell goods as a side hustle, you may need to pay tax on your profits.

HMRC has launched a new press release encouraging Christmas crafters and anyone with a fee earning hobby to check their tax reporting obligations as part of its Help for Hustles campaign. This is relevant to individuals earning extra income, whether from crafting Christmas decorations, selling festive items at market stalls, or upcycling furniture for seasonal sales. Those earning more than £1,000 in total from these activities may need to report their earnings to HMRC.

To help these side hustlers navigate their tax obligations, HMRC has introduced an online checker tool that helps individuals determine whether or not they need to declare additional income.

There are two £1,000 tax allowances available for small amounts of miscellaneous income: one for trading income and one for property income. Taxpayers who have both types of income can claim £1,000 for each.

• Trading Allowance: If a taxpayer makes up to £1,000 from self-employment (e.g., craft sales or content creation), this income is tax-free and doesn’t need to be declared. However, the £1,000 threshold applies to all combined trading activities. For example, if someone earns £600 from craft sales and £500 from content creation, their total trading income exceeds £1,000 and must be reported to HMRC.
• Property Allowance: If a taxpayer earns £1,000 or less from property-related activities (e.g., renting out a driveway), they don’t need to report this income to HMRC or include it in their tax return.

These allowances cover all relevant income before expenses. If a taxpayer's income is under £1,000, it’s tax-free. If they earn more than £1,000, they can either deduct the £1,000 allowance from their income or list their actual expenses when calculating taxable profit.

However, if side hustle income exceeds £1,000 in a tax year, taxpayers may need to complete a Self-Assessment tax return. This also includes income from cryptoassets. Importantly, this requirement applies only to active trading or selling services. If someone is just clearing out old items, there is usually no need to worry about tax.

For the 2024-25 tax year, the deadline to submit a tax return online and pay any tax owed is 31 January 2026.

Paying tax arrears using HMRC payment plans

If you are unable to pay your tax bill, it's important to reach out to HMRC as soon as possible.

HMRC may offer a Time to Pay arrangement, allowing you to settle the debt in manageable instalments based on your financial situation.

Taxpayers with liabilities of up to £30,000 can use the online Time to Pay (TTP) service to set up instalment payments. This service is available without the need for direct contact with an HMRC advisor and can be accessed up to 60 days after the payment deadline.

To be eligible for the online service, the following conditions must be met:

• No outstanding tax returns
• No other unpaid tax debts
• No existing HMRC payment plans

For those who do not qualify for the online option, alternative payment plans can be arranged. These plans are typically tailored to the individual's or business's specific financial situation, allowing repayment over an agreed period.

HMRC will generally grant extended payment terms if they believe you will be able to pay the full amount in the future. However, if HMRC determines that additional time won't resolve the issue, they may require immediate payment and take enforcement actions if the debt remains unpaid.

Updating your tax code

It is quite common for tax codes to be wrong, particularly if your income or employment situation has changed, so it is worth taking a few moments to check that HMRC has the correct information about you.

HMRC usually updates your tax code automatically when your income changes, using information provided by your employer. However, if HMRC has inaccurate details about your income you may be given an incorrect tax code. To fix this, ensure HMRC has your up-to-date income details and check what you need to do if you are on an emergency tax code.

If you believe your tax code is wrong, you can use HMRC’s Check your Income Tax online service to update employment details or to report income changes that might affect your tax code. For example, you can add company benefits, missing income sources, claim employment expenses and update your estimated taxable income. HMRC may then adjust your tax code based on these updates.

If you cannot access the online service, you can contact HMRC directly. Once your details are updated, HMRC will inform both you and your employer or pension provider if your tax code changes. Your next payslip should show your new code and any corrections to your pay.

At the end of the tax year, if you have paid too much or too little tax, HMRC will issue either a P800 tax calculation letter or a Simple Assessment letter to explain any refund or amount owed.

When you don’t need to make payments on account

If you file a Self-Assessment return you may need to pay your tax in three instalments, so it is useful to know when payments on account apply and when they can be reduced or removed.

The first two payments on account are due by 31 January during the tax year and by the 31 July after the tax year has ended. Each payment on account is based on 50% of the previous year’s net Income Tax liability. Additionally, the third (or balancing) payment is due on 31 January after the tax year ends.

However, there are certain situations where you do not need to make payments on account such as:

1. Your last tax bill is under £1,000. If your self-assessment tax bill for the previous year is less than £1,000, you will not be required to make payments on account.
2. You have already paid the tax through other means. If at least 80% of the tax due has already been collected through other means, such as PAYE, then payments on account are not required. This might apply if you are employed and have sufficient tax deductions taken from your salary.
3. You have a low or no income in the current tax year. If you expect your income to be much lower in the current year, you can apply to reduce or cancel your payments on account. This can be done through HMRC’s online service or by submitting form SA303.

There is no limit on the number of times you can apply to adjust your payments on account. If your liability for 2024-25 is lower than for 2023-24, you can request HMRC to reduce your payments. The deadline to submit a claim to reduce your payments on account for 2024-25 is 31 January 2026.

If your taxable profits have increased, there is no obligation to inform HMRC, but your final balancing payment will obviously be higher.